No action
RMS FP: Eur 243.20
September 8, 2014
We are neutral on Hermes at the current price following LVMH’s announced spin-off of its Hermes stake. The spin-off highlights three issues: 1. LVMH would not have been successful in eventually taking control of the company; 2. LVMH could not sell the stake for cash in the market; 3. LVMH considered Hermes to be fully valued for deciding to sell its stake now. On that last point, we note that at the time of the announcement, Hermes was selling close to a all time relative high vs. LVMH. We do not recommend to short Hermes on the news of the spin-off. First of all, the market being efficient, one has to assume that the current share price post news has already incorporated the coming spin-off. It would be naïve to think that one could profit in advance of a news that is already widely disseminated in the market. But more importantly, Hermes, while looking expensive in absolute terms, is fair value relative to the luxury sector given its superior profitability. Hermes has the highest ebitda, operating, and net profit margins in the sector. Moreover, it is forecasted to have higher growth than most of its competitors. While the stock will fluctuate between now and the ex-spin-off date, we would rather be buyers of the stock on weakness. We are buyers below 200, and sellers above 270, while recommending to stay on the sidelines in between. There are better trades in the sector.
FULL REPORT ATTACHED
Special Situations: HERMES